"The Best Diversifiers For Your Equity Portfolio"

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Topic Author
Taylor Larimore
Advisory Board
Posts: 29946
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

"The Best Diversifiers For Your Equity Portfolio"

Post by Taylor Larimore »

Bogleheads:

Morningstar has an important article on its front page: "The Best Diversifiers For Your Equity Portfolio." These are excerpts:
"Many investors may be wondering if the end of that rally could be around the corner. And if it were, how would their portfolios respond?"

"And what we're looking for is a negative correlation coefficient. That would mean if my equities go up, X asset goes down. That's what I want if I'm looking for diversification."

"What surprised me in this latest data run, Susan, was that we didn't have to venture into long-term Treasuries to capture good diversification relative to equities. Short- and intermediate-term Treasuries did the job, too."

"Bloomberg Barclays Aggregate Fund was quite good as a diversifier for an equity portfolio, in part because as currently constituted, these aggregate trackers are very heavily tilted towards U.S. government bonds."

"When we looked at other equity types alongside the S&P 500, you didn't get a lot of bang for your buck in terms of diversification. So, foreign stocks, for example, somewhat uncorrelated to the U.S. equity market, but nonetheless, not an extremely low correlation. Same with U.S. small-caps, not too impressive there. Also, the alternative asset class' performance wasn't especially attractive there either from a diversification standpoint."
The Best Diversifiers For Your Equity Portfolio

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Buy a stock index fund and add bonds as you age."
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
nedsaid
Posts: 13811
Joined: Fri Nov 23, 2012 12:33 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by nedsaid »

Bonds are still a good diversifier for stocks, a potential problem is that interest rates are still so darned low. You can't collect 6%-7% anymore from a portfolio of quality bonds, you will get more like 2%, so the cushioning effect of bonds in future bear markets will be less as already low interest rates don't have as far to fall. In other words, less yield and less potential appreciation in bond value during the next bear market. It is interesting that folks are tempted to go with Liquid Alternative funds that use long/short techniques, derivatives, and leverage; from what I can see their returns are about the same as boring old bonds.
A fool and his money are good for business.
User avatar
Forester
Posts: 1551
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by Forester »

Assumptions based on the bond bull market could be misguided, who knows. I don't place much value in a 2015 study which looks back to 2005.
robertmcd
Posts: 554
Joined: Tue Aug 09, 2016 9:06 am

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by robertmcd »

nedsaid wrote: Tue Aug 20, 2019 10:37 am Bonds are still a good diversifier for stocks, a potential problem is that interest rates are still so darned low. You can't collect 6%-7% anymore from a portfolio of quality bonds, you will get more like 2%, so the cushioning effect of bonds in future bear markets will be less as already low interest rates don't have as far to fall. In other words, less yield and less potential appreciation in bond value during the next bear market. It is interesting that folks are tempted to go with Liquid Alternative funds that use long/short techniques, derivatives, and leverage; from what I can see their returns are about the same as boring old bonds.
Nedsaid,

What gets overlooked in this scenario is convexity. A 30 yr bond fund dropping from 2% to 1% will result in a larger gain than it dropping from 3% to 2%.

https://portfoliocharts.com/2019/05/27/ ... convexity/
User avatar
Sandtrap
Posts: 11740
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by Sandtrap »

. . . . . the one category that stood out in terms of offering decent diversification benefit was--I used SPDR Gold Shares, which owns gold bullion. That actually performed decently well as a diversifier for equity exposure.
(Christine Benz)

I wonder how many Bogleheads would agree with the use of SPDR (Gold Shares) as a diversifier???

j :happy
Wiki Bogleheads Wiki: Everything You Need to Know
Day9
Posts: 988
Joined: Mon Jun 11, 2012 6:22 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by Day9 »

nedsaid wrote: Tue Aug 20, 2019 10:37 am ...You can't collect 6%-7% anymore from a portfolio of quality bonds, you will get more like 2%...
This reminds me of how Jack Bogle used to say having an allocation to bonds is like having an "anchor to windward". I am no sailor but I took that to mean you have a part of your portfolio that will be going up, regardless of what the rest of your portfolio is doing. With today's low rates it's more like an anchor to zero real returns. I wish I had a large enough nautical vocabulary to come up with a witty analogy here.
I'm just a fan of the person I got my user name from
User avatar
Dialectical Investor
Posts: 527
Joined: Mon Dec 03, 2018 11:41 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by Dialectical Investor »

Day9 wrote: Tue Aug 20, 2019 12:01 pm
nedsaid wrote: Tue Aug 20, 2019 10:37 am ...You can't collect 6%-7% anymore from a portfolio of quality bonds, you will get more like 2%...
This reminds me of how Jack Bogle used to say having an allocation to bonds is like having an "anchor to windward". I am no sailor but I took that to mean you have a part of your portfolio that will be going up, regardless of what the rest of your portfolio is doing. With today's low rates it's more like an anchor to zero real returns. I wish I had a large enough nautical vocabulary to come up with a witty analogy here.
How about just, "An anchor"?
Day9
Posts: 988
Joined: Mon Jun 11, 2012 6:22 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by Day9 »

Dialectical Investor wrote: Tue Aug 20, 2019 12:37 pm
Day9 wrote: Tue Aug 20, 2019 12:01 pm
nedsaid wrote: Tue Aug 20, 2019 10:37 am ...You can't collect 6%-7% anymore from a portfolio of quality bonds, you will get more like 2%...
This reminds me of how Jack Bogle used to say having an allocation to bonds is like having an "anchor to windward". I am no sailor but I took that to mean you have a part of your portfolio that will be going up, regardless of what the rest of your portfolio is doing. With today's low rates it's more like an anchor to zero real returns. I wish I had a large enough nautical vocabulary to come up with a witty analogy here.
How about just, "An anchor"?
:) :oops: :mrgreen: Thank you that is hilarious and I am wondering how I did not think of that myself!
I'm just a fan of the person I got my user name from
asif408
Posts: 2188
Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by asif408 »

robertmcd wrote: Tue Aug 20, 2019 11:55 am Nedsaid,

What gets overlooked in this scenario is convexity. A 30 yr bond fund dropping from 2% to 1% will result in a larger gain than it dropping from 3% to 2%.

https://portfoliocharts.com/2019/05/27/ ... convexity/
What you are overlooking is that a 30 yr bond fund rising from 1% to 2% will also result in a larger loss than it rising from 2% to 3%. It goes both ways. If you are a retiree and have a bond heavy portfolio I don't see any reason to go long Treasuries, because you increase your chances of more extreme outcomes, both positive and negative. Taylor's advice seem more wise, especially for those most concerned about capital preservation. Now if you're young and own mostly stocks and want to use long bonds as a ballast that's a different story.......
robertmcd
Posts: 554
Joined: Tue Aug 09, 2016 9:06 am

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by robertmcd »

asif408 wrote: Tue Aug 20, 2019 12:55 pm
robertmcd wrote: Tue Aug 20, 2019 11:55 am Nedsaid,

What gets overlooked in this scenario is convexity. A 30 yr bond fund dropping from 2% to 1% will result in a larger gain than it dropping from 3% to 2%.

https://portfoliocharts.com/2019/05/27/ ... convexity/
What you are overlooking is that a 30 yr bond fund rising from 1% to 2% will also result in a larger loss than it rising from 2% to 3%. It goes both ways. If you are a retiree and have a bond heavy portfolio I don't see any reason to go long Treasuries, because you increase your chances of more extreme outcomes, both positive and negative. Taylor's advice seem more wise, especially for those most concerned about capital preservation. Now if you're young and own mostly stocks and want to use long bonds as a ballast that's a different story.......
I agree. It all depends on your stock allocation and the return you are aiming for. But I still believe most boglehead retirees do not hold the proper bonds for their stock allocation. I think VTI in combination with a short, intermediate, long term, or extended duration treasury ETF is the perfect simple portfolio.
User avatar
Forester
Posts: 1551
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by Forester »

My understanding is that for risk-adjusted returns, US intermediates have historically out-performed long-term treasuries. Also, stocks and bonds were positively correlated from the Nixon era to 2000. A case for some gold!
User avatar
CULater
Posts: 2832
Joined: Sun Nov 13, 2016 10:59 am
Location: Hic sunt dracones

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by CULater »

Forester wrote: Tue Aug 20, 2019 1:51 pm My understanding is that for risk-adjusted returns, US intermediates have historically out-performed long-term treasuries. Also, stocks and bonds were positively correlated from the Nixon era to 2000. A case for some gold!
Yes, but the Sharpe ratio for short treasuries is even larger than for intermediates. Should we therefore invest only in short treasuries? The Sharpe Ratio itself should not be used to decide between investments. It's the total portfolio that counts.
On the internet, nobody knows you're a dog.
RadAudit
Posts: 3914
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by RadAudit »

Day9 wrote: Tue Aug 20, 2019 12:01 pm This reminds me of how Jack Bogle used to say having an allocation to bonds is like having an "anchor to windward".
What that means to me is that you can keep the boat (and you) from wrecking on a lee shore (that's downwind from your current position.)
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.
robertmcd
Posts: 554
Joined: Tue Aug 09, 2016 9:06 am

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by robertmcd »

CULater wrote: Tue Aug 20, 2019 3:05 pm
Forester wrote: Tue Aug 20, 2019 1:51 pm My understanding is that for risk-adjusted returns, US intermediates have historically out-performed long-term treasuries. Also, stocks and bonds were positively correlated from the Nixon era to 2000. A case for some gold!
Yes, but the Sharpe ratio for short treasuries is even larger than for intermediates. Should we therefore invest only in short treasuries? The Sharpe Ratio itself should not be used to decide between investments. It's the total portfolio that counts.
Correct, unless you are willing to use leverage thru futures, at high stock allocations (60% or higher), extended duration treasuries (20-30 strips) have been the best diversifier, even though though they have the lowest sharpe ratio of all the treasury bond maturities.
User avatar
abuss368
Posts: 21520
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by abuss368 »

Thanks Taylor!
John C. Bogle: “Simplicity is the master key to financial success."
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by fortyofforty »

Thank you once again, Taylor. It's old advice, and still relevant. Sometimes we trip ourselves up trying to find the "best" thing to solve a perceived need, instead of choosing simplicity.
User avatar
Doc
Posts: 9798
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by Doc »

fortyofforty wrote: Tue Aug 20, 2019 8:56 pm Thank you once again, Taylor. It's old advice, and still relevant. Sometimes we trip ourselves up trying to find the "best" thing to solve a perceived need, instead of choosing simplicity.
From the article:

"What surprised me in this latest data run, Susan, was that we didn't have to venture into long-term Treasuries to capture good diversification relative to equities. Short- and intermediate-term Treasuries did the job, too. And the reason that's important is because short- and intermediate-term Treasuries are much less volatile than long-term Treasuries. The main reason most investors don't own long-term Treasuries is that they tend to have almost equity-like volatility. Well, the good news is that you don't have to venture into them to get good diversification for your equity portfolio."

I had the impression that long Treasuries were the old advice.

Personally I've always used intermediate T's but that is because my time frame is not long. :(
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
User avatar
vineviz
Posts: 7807
Joined: Tue May 15, 2018 1:55 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by vineviz »

Doc wrote: Wed Aug 21, 2019 11:55 am From the article:

"What surprised me in this latest data run, Susan, was that we didn't have to venture into long-term Treasuries to capture good diversification relative to equities. Short- and intermediate-term Treasuries did the job, too.
Morningstar found this “surprising” result because they misdefined “diversification” by treating de-risking and diversification as equivalent.

They are not, and Morningstar should know better because they just republished an article about de-risking.

It’s an error equivalent to confusing speed with velocity or mass with weight: a common error, but one that a specialist should readily identify.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
CULater
Posts: 2832
Joined: Sun Nov 13, 2016 10:59 am
Location: Hic sunt dracones

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by CULater »

vineviz wrote: Wed Aug 21, 2019 12:13 pm
Doc wrote: Wed Aug 21, 2019 11:55 am From the article:

"What surprised me in this latest data run, Susan, was that we didn't have to venture into long-term Treasuries to capture good diversification relative to equities. Short- and intermediate-term Treasuries did the job, too.
Morningstar found this “surprising” result because they misdefined “diversification” by treating de-risking and diversification as equivalent.

They are not, and Morningstar should know better because they just republished an article about de-risking.

It’s an error equivalent to confusing speed with velocity or mass with weight: a common error, but one that a specialist should readily identify.
Thanks. Perhaps you could nutshell "de-risking" vs. "diversification". We often think that diversification is a de-risking strategy, or at least a strategy to deliver better risk-adjusted returns. What's your take?
On the internet, nobody knows you're a dog.
User avatar
vineviz
Posts: 7807
Joined: Tue May 15, 2018 1:55 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by vineviz »

CULater wrote: Wed Aug 21, 2019 1:02 pm
vineviz wrote: Wed Aug 21, 2019 12:13 pm
Doc wrote: Wed Aug 21, 2019 11:55 am From the article:

"What surprised me in this latest data run, Susan, was that we didn't have to venture into long-term Treasuries to capture good diversification relative to equities. Short- and intermediate-term Treasuries did the job, too.
Morningstar found this “surprising” result because they misdefined “diversification” by treating de-risking and diversification as equivalent.

They are not, and Morningstar should know better because they just republished an article about de-risking.

It’s an error equivalent to confusing speed with velocity or mass with weight: a common error, but one that a specialist should readily identify.
Thanks. Perhaps you could nutshell "de-risking" vs. "diversification". We often think that diversification is a de-risking strategy, or at least a strategy to deliver better risk-adjusted returns. What's your take?

“De-risking” is most commonly defined as the process of reducing the variance of a portfolio.

“Diversification” is most commonly defined as the process of balancing the risk exposures within a portfolio.

It is possible to change a portfolio in ways that do both, do neither, or do one but not the other.

Starting with a portfolio that is 100% S&P 500, for instance and speaking in broad generalities:

Adding a small cap value fund would diversify but not de-risk.

Adding cash would de-risk but not diversify.

Adding a long-term Treasury bond fund would de-risk and diversify.

Adding a 3x leveraged S&P 500 fund would neither de-risk nor diversify.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
TaxingAccount
Posts: 180
Joined: Sun Mar 17, 2019 8:34 am

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by TaxingAccount »

.....
Last edited by TaxingAccount on Fri Aug 23, 2019 8:10 am, edited 2 times in total.
User avatar
Doc
Posts: 9798
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by Doc »

CULater wrote: Wed Aug 21, 2019 1:02 pm We often think that diversification is a de-risking strategy, or at least a strategy to deliver better risk-adjusted returns.
Christine Benz" wrote:And what we're looking for is a negative correlation coefficient.
I don't know if a negative correlation is a de-risking strategy or a deliverer of better risk-adjusted returns. And I don't really care. I want my FI price to go up when equity prices go down especially in a stock market crash. But I am going to buy into that crash so I want negative correlation in the short period. If I was going to say oh sith and just have another Jack I wouldn't care which is which.

That said, I was of the opinion that the negative correlation in such a period was greater with the longer T's than shorter. I took Benz's comment as saying that there was not that much difference recently. :?:

Added Edit:
vineviz wrote:“De-risking” is most commonly defined as the process of reducing the variance of a portfolio.
I interpret negative correlation as reducing the variance. But that still leaves open the question of whether or not short and intermediate Treasures are recently as good or almost as good as long T's.

As I inferred I am no longer going to buy T's with longer duration than my life expectancy so Benz's comment made me feel better..
Last edited by Doc on Wed Aug 21, 2019 2:28 pm, edited 1 time in total.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
User avatar
vineviz
Posts: 7807
Joined: Tue May 15, 2018 1:55 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by vineviz »

TaxingAccount wrote: Wed Aug 21, 2019 2:15 pm
vineviz wrote: Wed Aug 21, 2019 2:12 pm
“De-risking” is most commonly defined as the process of reducing the variance of a portfolio.

“Diversification” is most commonly defined as the process of balancing the risk exposures within a portfolio.
In the golden butterfly portfolio, how would replacing the 20% small cap portion with 20% international stock effect the portfolio's de-risking and diversification?
I have no idea what a golden butterfly portfolio holds. Sorry.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
vineviz
Posts: 7807
Joined: Tue May 15, 2018 1:55 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by vineviz »

Doc wrote: Wed Aug 21, 2019 2:18 pm I don't know if a negative correlation is a de-risking strategy or a deliverer of better risk-adjusted returns. And I don't really care. I want my FI price to go up when equity prices go down especially in a stock market crash. But I am going to buy into that crash so I want negative correlation in the short period. If I was going to say oh sith and just have another Jack I wouldn't care which is which.

That said, I was of the opinion that the negative correlation in such a period was greater with the longer T's than shorter. I took Benz's comment as saying that there was not that much difference recently. :?:
Negative correlation alone won’t tell you much about how effective something is as a diversifier: that’s one of the problems with Benz’s analysis.

Treasuries of varying duration (down to 30-day Tbills) virtually always have similar correlations to equities. This isn’t new.

Diversification also depends on variance, though, and Benz appears to have overlooked this fact in her comment.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
CULater
Posts: 2832
Joined: Sun Nov 13, 2016 10:59 am
Location: Hic sunt dracones

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by CULater »

vineviz wrote: Wed Aug 21, 2019 2:21 pm
TaxingAccount wrote: Wed Aug 21, 2019 2:15 pm
vineviz wrote: Wed Aug 21, 2019 2:12 pm
“De-risking” is most commonly defined as the process of reducing the variance of a portfolio.

“Diversification” is most commonly defined as the process of balancing the risk exposures within a portfolio.
In the golden butterfly portfolio, how would replacing the 20% small cap portion with 20% international stock effect the portfolio's de-risking and diversification?
I have no idea what a golden butterfly portfolio holds. Sorry.
GB holds 20% TSM, 20% SCV, 20% LTT, 20% STT, and 20% Gold. My guess is that 20% international ex-U.S. would correlate more highly with TSM than SCV. Since 1986, using International instead of SCV resulted in a risk adjusted return of 0.62 vs. 0.74 with SCV, with a larger max drawdown. Looks to me that International did not diversify as well as SCV. Riskiness, as measured by annualized SD, was about the same. Of course, we don't know what's going to happen in the future, but unless the correlation between U.S. and Foreign stocks declines the diversification value of Foreign stocks won't change much.
On the internet, nobody knows you're a dog.
User avatar
willthrill81
Posts: 20832
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by willthrill81 »

TaxingAccount wrote: Wed Aug 21, 2019 2:15 pm
vineviz wrote: Wed Aug 21, 2019 2:12 pm
CULater wrote: Wed Aug 21, 2019 1:02 pm
vineviz wrote: Wed Aug 21, 2019 12:13 pm
Doc wrote: Wed Aug 21, 2019 11:55 am From the article:

"What surprised me in this latest data run, Susan, was that we didn't have to venture into long-term Treasuries to capture good diversification relative to equities. Short- and intermediate-term Treasuries did the job, too.
Morningstar found this “surprising” result because they misdefined “diversification” by treating de-risking and diversification as equivalent.

They are not, and Morningstar should know better because they just republished an article about de-risking.

It’s an error equivalent to confusing speed with velocity or mass with weight: a common error, but one that a specialist should readily identify.
Thanks. Perhaps you could nutshell "de-risking" vs. "diversification". We often think that diversification is a de-risking strategy, or at least a strategy to deliver better risk-adjusted returns. What's your take?

“De-risking” is most commonly defined as the process of reducing the variance of a portfolio.

“Diversification” is most commonly defined as the process of balancing the risk exposures within a portfolio.

It is possible to change a portfolio in ways that do both, do neither, or do one but not the other.

Starting with a portfolio that is 100% S&P 500, for instance and speaking in broad generalities:

Adding a small cap value fund would diversify but not de-risk.

Adding cash would de-risk but not diversify.

Adding a long-term Treasury bond fund would de-risk and diversify.

Adding a 3x leveraged S&P 500 fund would neither de-risk nor diversify.
In the golden butterfly portfolio, how would replacing the 20% small cap value portion with 20% international stock effect the portfolio's de-risking and diversification?
Golden Butterfly:
20% TSM
20% SCV
20% Short-term Treasuries
20% Long-term Treasuries
20% Gold

Over the last 20 years, TSM has been more strongly correlated with international stock's (r = .87) than with SCV (r = .78). So substituting SCV for international stock would have reduced the diversification in terms of returns over this specific period. Many, though certainly not all, believe that SCV is likely to have higher returns and volatility than total market indices, so such a substitution might de-risk the portfolio somewhat.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
User avatar
abuss368
Posts: 21520
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by abuss368 »

Correlation varies with the market. Sometimes asset classes can move close together - US and International in financial crisis - and other times different directions - US and REITs during tech bubble.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
nedsaid
Posts: 13811
Joined: Fri Nov 23, 2012 12:33 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by nedsaid »

vineviz wrote: Wed Aug 21, 2019 2:21 pm
TaxingAccount wrote: Wed Aug 21, 2019 2:15 pm
vineviz wrote: Wed Aug 21, 2019 2:12 pm
“De-risking” is most commonly defined as the process of reducing the variance of a portfolio.

“Diversification” is most commonly defined as the process of balancing the risk exposures within a portfolio.
In the golden butterfly portfolio, how would replacing the 20% small cap portion with 20% international stock effect the portfolio's de-risking and diversification?
I have no idea what a golden butterfly portfolio holds. Sorry.
I don't know, folks just seem to have a need to name things. Let's see, the Taylor Larimore 3 Fund Portfolio. Paul Merriman has the Ultimate Buy and Hold Portfolio. Bill Schultheis came up with the Coffeehouse Portfolio. There is the Harry Browne Permanent Portfolio. The Golden Butterfly sounds pretty, we know it contains Gold. I think Bill Bernstein has a No Brainer portfolio, a weird name for somebody so darned smart, it seems misnamed. That is probably what I am lacking, a nickname for my own portfolio. I need a trademark and to sell a book!
A fool and his money are good for business.
jsprag
Posts: 201
Joined: Sun Nov 26, 2017 11:25 am

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by jsprag »

nedsaid wrote: Wed Aug 21, 2019 3:21 pm
vineviz wrote: Wed Aug 21, 2019 2:21 pm
TaxingAccount wrote: Wed Aug 21, 2019 2:15 pm
vineviz wrote: Wed Aug 21, 2019 2:12 pm
“De-risking” is most commonly defined as the process of reducing the variance of a portfolio.

“Diversification” is most commonly defined as the process of balancing the risk exposures within a portfolio.
In the golden butterfly portfolio, how would replacing the 20% small cap portion with 20% international stock effect the portfolio's de-risking and diversification?
I have no idea what a golden butterfly portfolio holds. Sorry.
I don't know, folks just seem to have a need to name things. Let's see, the Taylor Larimore 3 Fund Portfolio. Paul Merriman has the Ultimate Buy and Hold Portfolio. Bill Schultheis came up with the Coffeehouse Portfolio. There is the Harry Browne Permanent Portfolio. The Golden Butterfly sounds pretty, we know it contains Gold. I think Bill Bernstein has a No Brainer portfolio, a weird name for somebody so darned smart, it seems misnamed. That is probably what I am lacking, a nickname for my own portfolio. I need a trademark and to sell a book!
I propose the "No-Effort Diversified Solution Across Investment Domains (NEDSAID) Portfolio".

I'll PM you with details for forwarding my quarterly share of the royalties :wink:
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by fortyofforty »

Doc wrote: Wed Aug 21, 2019 2:18 pm
CULater wrote: Wed Aug 21, 2019 1:02 pm We often think that diversification is a de-risking strategy, or at least a strategy to deliver better risk-adjusted returns.
Christine Benz" wrote:And what we're looking for is a negative correlation coefficient.
I don't know if a negative correlation is a de-risking strategy or a deliverer of better risk-adjusted returns. And I don't really care. I want my FI price to go up when equity prices go down especially in a stock market crash. But I am going to buy into that crash so I want negative correlation in the short period. If I was going to say oh sith and just have another Jack I wouldn't care which is which.

That said, I was of the opinion that the negative correlation in such a period was greater with the longer T's than shorter. I took Benz's comment as saying that there was not that much difference recently. :?:

Added Edit:
vineviz wrote:“De-risking” is most commonly defined as the process of reducing the variance of a portfolio.
I interpret negative correlation as reducing the variance. But that still leaves open the question of whether or not short and intermediate Treasures are recently as good or almost as good as long T's.

As I inferred I am no longer going to buy T's with longer duration than my life expectancy so Benz's comment made me feel better..
I think I will simply let the market decide for me, in terms of bond maturities. The closest I can come, reasonably, is a Total Bond Market portfolio, so I choose that path. Good luck on your own journey.
User avatar
Doc
Posts: 9798
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by Doc »

fortyofforty wrote: Thu Aug 22, 2019 8:35 am I think I will simply let the market decide for me, in terms of bond maturities.
The bond market is dominated by large players that have much different objectives than you and me. I don't care to have a large life insurance company with obligations out 30, 40, 50 years to decide my bond portfolio for me.

That said using TBM at least is an easy choice.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by fortyofforty »

Doc wrote: Thu Aug 22, 2019 9:17 am
fortyofforty wrote: Thu Aug 22, 2019 8:35 am I think I will simply let the market decide for me, in terms of bond maturities.
The bond market is dominated by large players that have much different objectives than you and me. I don't care to have a large life insurance company with obligations out 30, 40, 50 years to decide my bond portfolio for me.

That said using TBM at least is an easy choice.
You're right, TBM is an imperfect selection. Companies like Vanguard must make many choices in portfolio construction, and that adds a lot of variables not connected to market weight.
3funder
Posts: 1448
Joined: Sun Oct 15, 2017 9:35 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by 3funder »

Sandtrap wrote: Tue Aug 20, 2019 11:58 am
. . . . . the one category that stood out in terms of offering decent diversification benefit was--I used SPDR Gold Shares, which owns gold bullion. That actually performed decently well as a diversifier for equity exposure.
(Christine Benz)

I wonder how many Bogleheads would agree with the use of SPDR (Gold Shares) as a diversifier???

j :happy
Be nice; to me, gold is a dirty word :wink: .
NMBob
Posts: 362
Joined: Thu Apr 23, 2015 8:13 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by NMBob »

65percent us market with 35 short/mid/long treasuries 1978-july 2019


Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio US Mkt Correlation
35%short $10,000 $505,130 9.89% 9.99% 27.50% -21.74% -32.60% 0.56 0.82 0.99
35%mid $10,000 $603,588 10.36% 10.21% 30.42% -19.41% -31.05% 0.59 0.87 0.98
35%long $10,000 $754,569 10.96% 10.77% 33.79% -16.20% -30.08% 0.62 0.92 0.93

https://www.portfoliovisualizer.com/bac ... total3=100
User avatar
abuss368
Posts: 21520
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by abuss368 »

nedsaid wrote: Wed Aug 21, 2019 3:21 pm I don't know, folks just seem to have a need to name things. Let's see, the Taylor Larimore 3 Fund Portfolio. Paul Merriman has the Ultimate Buy and Hold Portfolio. Bill Schultheis came up with the Coffeehouse Portfolio. There is the Harry Browne Permanent Portfolio. The Golden Butterfly sounds pretty, we know it contains Gold. I think Bill Bernstein has a No Brainer portfolio, a weird name for somebody so darned smart, it seems misnamed. That is probably what I am lacking, a nickname for my own portfolio. I need a trademark and to sell a book!
Too funny nedsaid!
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
CULater
Posts: 2832
Joined: Sun Nov 13, 2016 10:59 am
Location: Hic sunt dracones

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by CULater »

vineviz wrote: Wed Aug 21, 2019 12:13 pm
Doc wrote: Wed Aug 21, 2019 11:55 am From the article:

"What surprised me in this latest data run, Susan, was that we didn't have to venture into long-term Treasuries to capture good diversification relative to equities. Short- and intermediate-term Treasuries did the job, too.
Morningstar found this “surprising” result because they misdefined “diversification” by treating de-risking and diversification as equivalent.

They are not, and Morningstar should know better because they just republished an article about de-risking.

It’s an error equivalent to confusing speed with velocity or mass with weight: a common error, but one that a specialist should readily identify.
Thanks for your work on this. I regard the distinction between de-risking and diversification as a very important clarification that has been of great help to me in refining my asset allocation. I highly recommend this thread by Vineviz on the subject if you haven't read it.

viewtopic.php?t=285269
On the internet, nobody knows you're a dog.
User avatar
nedsaid
Posts: 13811
Joined: Fri Nov 23, 2012 12:33 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by nedsaid »

abuss368 wrote: Thu Aug 22, 2019 12:07 pm
nedsaid wrote: Wed Aug 21, 2019 3:21 pm I don't know, folks just seem to have a need to name things. Let's see, the Taylor Larimore 3 Fund Portfolio. Paul Merriman has the Ultimate Buy and Hold Portfolio. Bill Schultheis came up with the Coffeehouse Portfolio. There is the Harry Browne Permanent Portfolio. The Golden Butterfly sounds pretty, we know it contains Gold. I think Bill Bernstein has a No Brainer portfolio, a weird name for somebody so darned smart, it seems misnamed. That is probably what I am lacking, a nickname for my own portfolio. I need a trademark and to sell a book!
Too funny nedsaid!
Okay, the "Nedsaid, believe me I have thought of everything portfolio." The trademark paperwork is being filed as we speak. :wink:
A fool and his money are good for business.
User avatar
abuss368
Posts: 21520
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by abuss368 »

nedsaid wrote: Thu Aug 22, 2019 1:17 pm
abuss368 wrote: Thu Aug 22, 2019 12:07 pm
nedsaid wrote: Wed Aug 21, 2019 3:21 pm I don't know, folks just seem to have a need to name things. Let's see, the Taylor Larimore 3 Fund Portfolio. Paul Merriman has the Ultimate Buy and Hold Portfolio. Bill Schultheis came up with the Coffeehouse Portfolio. There is the Harry Browne Permanent Portfolio. The Golden Butterfly sounds pretty, we know it contains Gold. I think Bill Bernstein has a No Brainer portfolio, a weird name for somebody so darned smart, it seems misnamed. That is probably what I am lacking, a nickname for my own portfolio. I need a trademark and to sell a book!
Too funny nedsaid!
Okay, the "Nedsaid, believe me I have thought of everything portfolio." The trademark paperwork is being filed as we speak. :wink:
I have one as well as we pretty much invest in stocks, bonds, real estate - both U.S. and International (although we have not added international bonds thus far) - "Six Pack"
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
nedsaid
Posts: 13811
Joined: Fri Nov 23, 2012 12:33 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by nedsaid »

The Six Pack Portfolio is actually pretty good for a portfolio name. You probably ought to work in the marketing department. It could mean that your investments are in beer or it could mean that you hit the gym and have low body fat. I take it to mean you have a 6 fund portfolio, which sounds pretty optimal. More complex than 3 but you can add such things as REITs and TIPS.
A fool and his money are good for business.
User avatar
Doc
Posts: 9798
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by Doc »

NMBob wrote: Thu Aug 22, 2019 11:27 am 65percent us market with 35 short/mid/long treasuries 1978-july 2019


Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio US Mkt Correlation
35%short $10,000 $505,130 9.89% 9.99% 27.50% -21.74% -32.60% 0.56 0.82 0.99
35%mid $10,000 $603,588 10.36% 10.21% 30.42% -19.41% -31.05% 0.59 0.87 0.98
35%long $10,000 $754,569 10.96% 10.77% 33.79% -16.20% -30.08% 0.62 0.92 0.93

https://www.portfoliovisualizer.com/bac ... total3=100
There are two considerations in the bond/equity decision process: long term and short term. If you have a set it and forget it portfolio and only rebalance on your mother in law's birthday the above analysis is appropriate. But if you are going to rebalance during a stock market crash those long term correlations aren't going to give you good answers.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
catalina355
Posts: 283
Joined: Sun Jun 10, 2018 6:46 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by catalina355 »

Doc wrote: Wed Aug 21, 2019 11:55 am
fortyofforty wrote: Tue Aug 20, 2019 8:56 pm Thank you once again, Taylor. It's old advice, and still relevant. Sometimes we trip ourselves up trying to find the "best" thing to solve a perceived need, instead of choosing simplicity.
From the article:

"What surprised me in this latest data run, Susan, was that we didn't have to venture into long-term Treasuries to capture good diversification relative to equities. Short- and intermediate-term Treasuries did the job, too. And the reason that's important is because short- and intermediate-term Treasuries are much less volatile than long-term Treasuries. The main reason most investors don't own long-term Treasuries is that they tend to have almost equity-like volatility. Well, the good news is that you don't have to venture into them to get good diversification for your equity portfolio."

I had the impression that long Treasuries were the old advice.

Personally I've always used intermediate T's but that is because my time frame is not long. :(
Which fund do you use for intermediate T's? Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)?
User avatar
CULater
Posts: 2832
Joined: Sun Nov 13, 2016 10:59 am
Location: Hic sunt dracones

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by CULater »

Per Vineviz's post regarding Diversification vs. De-risking, the degree of diversification is a function of asset correlations and asset variance. There should therefore be a simple statistical formula that would quantify the degree of portfolio diversification. We could use this to calculate a "diversification index" for given portfolios. Is anyone familiar with such computation?
On the internet, nobody knows you're a dog.
User avatar
Doc
Posts: 9798
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by Doc »

catalina355 wrote: Fri Aug 23, 2019 7:19 am Which fund do you use for intermediate T's? Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)?
I don't use funds for intermediate term Treasuries. It makes more sense for me to use actual notes generally as a 7-3 ladder so as to capture the roll down bonus if/when it exists. If I was in a position where individual notes was not an option I would prefer a 3-7 fund/etf like iShares 3-7 Year Treasury Bond ETF IEI. The Vanguard fund is a 3-10 which is not going to be the most effective for getting any roll down bonus.

See: Roll-Down Return https://www.investopedia.com/terms/r/rolldownreturn.asp for an explanation.

Note that with today's flat yield curve there is currently no roll down bonus for new issues so I am not buying intermediate T's at all only short (1-3yr) funds or T-Bills.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
User avatar
vineviz
Posts: 7807
Joined: Tue May 15, 2018 1:55 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by vineviz »

CULater wrote: Fri Aug 23, 2019 8:17 am Per Vineviz's post regarding Diversification vs. De-risking, the degree of diversification is a function of asset correlations and asset variance. There should therefore be a simple statistical formula that would quantify the degree of portfolio diversification. We could use this to calculate a "diversification index" for given portfolios. Is anyone familiar with such computation?
Technically speaking, diversification is more of a relative attribute rather than an absolute attribute. So it's really only possible to "index" one portfolio relative to another portfolio.

But there is a metric for this called "diversification ratio", which is calculated as the weighted average of asset volatilities divided by the portfolio volatility.

Image

As with any simple metric, diversification ratio has strengths and limitations some of which are discussed in this thread.

Some example calculations using these three funds [annualized standard deviation from inception in brackets]:
• iShares Core S&P Total US Stock Mkt ETF (ITOT). [14.27%]
• iShares Core US Aggregate Bond ETF (AGG). [3.65%]
• iShares 20+ Year Treasury Bond ETF (TLT). [12.96%]

Calculating the portfolio volatility for two 80/20 portfolios using these funds gives these results (you can use a backtest like PortfolioVisualizer or calculate manually using covariances, but PV is easier):
• An 80/20 portfolio of ITOT and AGG has a standard deviation of 11.36%.
• An 80/20 portfolio of ITOT and TLT has a standard deviation of 10.80%

So the diversification ratio of the first portfolio is ((0.8 x 14.27%) + (0.2 x 3.65%))/11.36% = 1.07

And the diversification ratio of the second portfolio is ((0.8 x 14.27%) + (0.2 x 12.96%))/10.80% = 1.30

Because 1.30 > 1.07, the ITOT/TLT portfolio is more diversified than the ITOT/AGG portfolio.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
CULater
Posts: 2832
Joined: Sun Nov 13, 2016 10:59 am
Location: Hic sunt dracones

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by CULater »

Pursuant to quantitatively evaluating "diversification", I used the ratio between the weighted average of the volatilities of individual assets divided by the portfolio volatility. (vineviz formula above). This is the combination of risks (volatility of individual assets) divided by the risk of the combination (portfolio volatility) and the ratio gives an indication of the "diversification benefit" of the portfolio.

From 2008-2019 a standard 60/40 portfolio of 60% TSM, 40% Intermediate Treasuries had an annualized SD of 8.80% with a max drawdown of -26.5% and Sharpe of 0.77. The CAGR was 7.2%.

For the same period, a portfolio with 50% TSM, 50% Long Treasuries (TLT) had an annualized SD of 8.78% with a max drawdown of -17.3% and a Sharpe of 0.95. The CAGR was 8.9%. So, these portfolios had similar overall volatility, but the 50/50 portfolio was superior to 60/40 in terms of return, drawdown, and risk-adjusted return.

Calculating the Diversification Ratio for both portfolios, I find that the ratio of the 60/40 portfolio was 81.5%, indicating there was an 18.5% reduction in portfolio volatility vs. the weighted average of TSM/ Intermediate. I find that the ratio of the 50/50 portfolio (TSM + TLT) was 59.5%, indicating there was a 40.5% reduction in portfolio volatility vs. the weighted average of TSM and TLT.

Since the two portfolios had a similar level of annualized volatility we might assume that they were similarly "risky" in terms of that measure. However, at the same overall risk level, the 50/50 combination using Long Treasuries provided an excess diversification benefit of 41.5% vs. 18.5%. It can be inferred that this higher level of diversification accounted for the superior compounded return and higher risk-adjusted return of this portfolio over the period since 2008.
On the internet, nobody knows you're a dog.
DecumulatorDoc
Posts: 191
Joined: Sun Jan 28, 2018 7:48 am

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by DecumulatorDoc »

Taylor Larimore wrote: Tue Aug 20, 2019 9:25 am Bogleheads:

Morningstar has an important article on its front page: "The Best Diversifiers For Your Equity Portfolio." These are excerpts:
"Many investors may be wondering if the end of that rally could be around the corner. And if it were, how would their portfolios respond?"

"And what we're looking for is a negative correlation coefficient. That would mean if my equities go up, X asset goes down. That's what I want if I'm looking for diversification."

"What surprised me in this latest data run, Susan, was that we didn't have to venture into long-term Treasuries to capture good diversification relative to equities. Short- and intermediate-term Treasuries did the job, too."

"Bloomberg Barclays Aggregate Fund was quite good as a diversifier for an equity portfolio, in part because as currently constituted, these aggregate trackers are very heavily tilted towards U.S. government bonds."

"When we looked at other equity types alongside the S&P 500, you didn't get a lot of bang for your buck in terms of diversification. So, foreign stocks, for example, somewhat uncorrelated to the U.S. equity market, but nonetheless, not an extremely low correlation. Same with U.S. small-caps, not too impressive there. Also, the alternative asset class' performance wasn't especially attractive there either from a diversification standpoint."
The Best Diversifiers For Your Equity Portfolio

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Buy a stock index fund and add bonds as you age."
Important lesson: I believe its been written that 90% of our long term performance is determined by our basic equity to bond allocation. That is the most important decision we make. Lots of posts arguing about SCV tilts or appropriate international allocations, but that's all just icing on the cake.
User avatar
LilyFleur
Posts: 1499
Joined: Fri Mar 02, 2018 10:36 pm

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by LilyFleur »

DecumulatorDoc wrote: Fri Aug 23, 2019 11:20 am
Taylor Larimore wrote: Tue Aug 20, 2019 9:25 am Bogleheads:

Morningstar has an important article on its front page: "The Best Diversifiers For Your Equity Portfolio." These are excerpts:
"Many investors may be wondering if the end of that rally could be around the corner. And if it were, how would their portfolios respond?"

"And what we're looking for is a negative correlation coefficient. That would mean if my equities go up, X asset goes down. That's what I want if I'm looking for diversification."

"What surprised me in this latest data run, Susan, was that we didn't have to venture into long-term Treasuries to capture good diversification relative to equities. Short- and intermediate-term Treasuries did the job, too."

"Bloomberg Barclays Aggregate Fund was quite good as a diversifier for an equity portfolio, in part because as currently constituted, these aggregate trackers are very heavily tilted towards U.S. government bonds."

"When we looked at other equity types alongside the S&P 500, you didn't get a lot of bang for your buck in terms of diversification. So, foreign stocks, for example, somewhat uncorrelated to the U.S. equity market, but nonetheless, not an extremely low correlation. Same with U.S. small-caps, not too impressive there. Also, the alternative asset class' performance wasn't especially attractive there either from a diversification standpoint."
The Best Diversifiers For Your Equity Portfolio

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Buy a stock index fund and add bonds as you age."
Important lesson: I believe its been written that 90% of our long term performance is determined by our basic equity to bond allocation. That is the most important decision we make. Lots of posts arguing about SCV tilts or appropriate international allocations, but that's all just icing on the cake.
I am not going to pretend to completely understand the discussion in this thread on the differences between de-risking and diversification. I don't understand "tilts." I do understand Taylor's post and the article he linked to, and I understand the basic Boglehead approach and I have read Malkiel's "A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing." I have also been learning from this forum.

So, bottom line: According to my AA, if I have invested in a bond fund with a .03% ER that approximates the Bloomberg Barclays Aggregate Fund, am I doing OK?
DecumulatorDoc
Posts: 191
Joined: Sun Jan 28, 2018 7:48 am

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by DecumulatorDoc »

LilyFleur wrote: Fri Aug 23, 2019 11:40 am
DecumulatorDoc wrote: Fri Aug 23, 2019 11:20 am
Taylor Larimore wrote: Tue Aug 20, 2019 9:25 am Bogleheads:

Morningstar has an important article on its front page: "The Best Diversifiers For Your Equity Portfolio." These are excerpts:
"Many investors may be wondering if the end of that rally could be around the corner. And if it were, how would their portfolios respond?"

"And what we're looking for is a negative correlation coefficient. That would mean if my equities go up, X asset goes down. That's what I want if I'm looking for diversification."

"What surprised me in this latest data run, Susan, was that we didn't have to venture into long-term Treasuries to capture good diversification relative to equities. Short- and intermediate-term Treasuries did the job, too."

"Bloomberg Barclays Aggregate Fund was quite good as a diversifier for an equity portfolio, in part because as currently constituted, these aggregate trackers are very heavily tilted towards U.S. government bonds."

"When we looked at other equity types alongside the S&P 500, you didn't get a lot of bang for your buck in terms of diversification. So, foreign stocks, for example, somewhat uncorrelated to the U.S. equity market, but nonetheless, not an extremely low correlation. Same with U.S. small-caps, not too impressive there. Also, the alternative asset class' performance wasn't especially attractive there either from a diversification standpoint."
The Best Diversifiers For Your Equity Portfolio

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Buy a stock index fund and add bonds as you age."
Important lesson: I believe its been written that 90% of our long term performance is determined by our basic equity to bond allocation. That is the most important decision we make. Lots of posts arguing about SCV tilts or appropriate international allocations, but that's all just icing on the cake.
I am not going to pretend to completely understand the discussion in this thread on the differences between de-risking and diversification. I don't understand "tilts." I do understand Taylor's post and the article he linked to, and I understand the basic Boglehead approach and I have read Malkiel's "A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing." I have also been learning from this forum.

So, bottom line: According to my AA, if I have invested in a bond fund with a .03% ER that approximates the Bloomberg Barclays Aggregate Fund, am I doing OK?
Absolutely...and stick to it for the long haul.
User avatar
Doc
Posts: 9798
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by Doc »

LilyFleur wrote: Fri Aug 23, 2019 11:40 am So, bottom line: According to my AA, if I have invested in a bond fund with a .03% ER that approximates the Bloomberg Barclays Aggregate Fund, am I doing OK?
Yes you are doing OK. But the thread is about
The Best
Best and OK are not the same thing. What is best is subject to debate as this thread has shown but it also depends on the rest of your portfolio such as taxable/tax sheltered accounts, your own personal asset allocation and your "need, ability and willingness to take risk."

viewtopic.php?t=129912#p1910626
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
User avatar
CULater
Posts: 2832
Joined: Sun Nov 13, 2016 10:59 am
Location: Hic sunt dracones

Re: "The Best Diversifiers For Your Equity Portfolio"

Post by CULater »

I don't know about the "best", but it is about "better." The basic idea is that at a given level of overall risk (defined as the typical variability of portfolio returns) being more diversified is better than being less diversified because it tends to produce better returns at that level of risk. Historically, that would have happened (compared to 60/40) if you had a static allocation to long term treasuries instead of intermediate term treasuries, with a higher bond allocation and a lower stock allocation. The problem with using intermediate treasuries instead of long treasuries is that increasing the bond allocation reduces the expected portfolio return that you might want/need. They tend to "de-risk" the portfolio (which is OK) but they do it at the cost of reducing expected return.

The first priority is to find a level of risk tolerance you can live with; then the second priority is to try to have a more diversified portfolio at that point of risk. My own view is that long bonds will continue to offer more diversification potential than intermediate bonds at a given risk level. One important reason for this is that they offer a better hedge against stock losses because of "flight to safety". They work better when stocks are falling and that's what you want.

But you can't overdo it because, taken alone, long treasuries are a lot riskier than intermediate treasuries. If you are not able to focus on the "forest" (the total portfolio) but instead look at the trees, then you'll get scared out of long treasuries; just like people get scared out of stocks when they are falling.

If you are going this route, which involves some portfolio engineering, it's important to understand what you're doing and get some help determine the optimal allocations. Not a good idea just to sell your intermediate bond fund and put the money into a long term bond fund without calibrating the allocations appropriately.
On the internet, nobody knows you're a dog.
Post Reply